FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

(Mark One)

 X    QUARTERLY  REPORT  PURSUANT  TO  SECTION  13 OR 15(d) OF THE  SECURITIES
---   EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 1997

                                       or

      TRANSITION  REPORT  PURSUANT  TO SECTION  13 OR 15(d) OF THE  SECURITIES
---   EXCHANGE ACT OF 1934

Commission File Number 0-19509

                              EQUUS II INCORPORATED
             (Exact name of registrant as specified in its charter)

                 Delaware                               76-0345915
      (State or other jurisdiction of                (I.R.S. Employer
      incorporation or organization)                 Identification No.)

      2929 Allen Parkway, Suite 2500
               Houston, Texas                             77019-2120
           (Address of principal                          (Zip Code)
            executive offices)

Registrant's telephone number, including area code:    (713)  529-0900

Securities registered pursuant to Section 12(b) of the Act:

            Title of each class                 Name of each exchange
                                                 on which registered
         
            Common Stock                        American Stock Exchange
            ------------                        -----------------------

Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X]  No [ ]

Approximate aggregate market value of common stock held by non-affiliates of the
registrant: $101,471,825 computed on the basis of $24.125 per share, closing
price of the common stock on the American Stock Exchange, Inc. November 10,
1997. For the purpose of calculating this amount only, all Directors and
executive officers of the registrant have been treated as affiliates. There were
4,760,655 shares of the registrant's common stock, $.001 par value, outstanding,
as of November 10, 1997. The net asset value of a share at September 30, 1997
was $32.59.

Documents incorporated by reference:  None
<PAGE>
                              EQUUS II INCORPORATED
                            (A Delaware Corporation)

                                      INDEX

PART I.   FINANCIAL INFORMATION                                           PAGE
                                                                          ----
          Item 1.Financial Statements

                 Balance Sheets

                 - September 30, 1997 and December 31, 1996.................   1

                 Statements of Operations

                 - For the three months ended September 30, 1997 and 1996 ..   2


                 - For the nine months ended September 30, 1997 and 1996 ...   3

                 Statements of Changes in Net Assets

                 - For the nine months ended September 30, 1997 and 1996 ...   4

                 Statements of Cash Flows

                 - For the nine months ended September 30, 1997 and 1996 ...   5

                 Selected Per Share Data and Ratios

                 - For the nine months ended September 30, 1997 and 1996 ...   7

                 Schedule of Portfolio Securities

                 - September 30, 1997.......................................   8

                 Notes to Financial Statements..............................  14

          Item 2.Management's Discussion and Analysis of
                 Financial Condition and Results of Operations   ...........  20

PART II.  OTHER INFORMATION

          Item 6.Exhibits and Reports on Form 8-K   ........................  25

SIGNATURE   ................................................................  26

                                       ii
<PAGE>
PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                              EQUUS II INCORPORATED
                                 BALANCE SHEETS
                   SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                           1997                  1996
                                                                      ---------------       --------------
<S>                                                                    <C>                   <C>          
ASSETS

Investments in portfolio securities at fair value
     (cost $78,772,913 and $69,388,024, respectively)                  $ 156,966,966         $ 111,059,488
Temporary cash investments, at cost which
     approximates fair value                                              85,456,678            69,129,290
Accounts receivable                                                          502,874                 1,326
Accrued interest receivable                                                  430,550               897,065
Commitment fees                                                               37,500                17,500
Deferred reorganization costs                                                      -                11,730
                                                                      ---------------       --------------
          Total assets                                                   243,394,568           181,116,399
                                                                      ---------------       --------------
LIABILITIES AND NET ASSETS

Liabilities:
     Accounts payable                                                        166,008               208,231
     Dividend payable                                                              -             1,209,850
     Due to management company                                               775,764               390,982
     Deferred management incentive fee                                             -            10,784,028
     Notes payable to bank                                                87,300,000            65,300,000
                                                                      ---------------       --------------
          Total liabilities                                               88,241,772            77,893,091
                                                                      ---------------       --------------
Commitments and contingencies

Net assets:
     Preferred stock, $.001 par value, 5,000,000 shares
        authorized, no shares issued or outstanding                                -                     -
     Common stock, $.001 par value, 10,000,000 shares
        authorized, 4,760,655 and 4,300,682 shares issued
        and outstanding, respectively                                          4,761                 4,301
     Additional paid-in capital                                           68,528,390            57,934,306
     Undistributed net investment income                                           -                     -
     Undistributed net capital gains                                       8,425,592             3,613,237
     Unrealized appreciation of portfolio securities, net                 78,194,053            41,671,464
                                                                      ---------------       --------------
          Total net assets                                             $ 155,152,796         $ 103,223,308
                                                                      ===============       ==============
          Net assets per share                                         $       32.59         $       24.00
                                                                      ===============       ==============
</TABLE>
              The accompanying notes are an integral part of these
                              financial statements.

                                       1
<PAGE>
                             EQUUS II INCORPORATED
                            STATEMENTS OF OPERATIONS
             FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
                                                                              1997            1996
                                                                           -----------     -----------
<S>                                                                         <C>            <C>        
Investment income:
     Income from portfolio securities                                       $1,718,123     $   873,262
     Interest from temporary cash investments                                   24,135          17,538
                                                                           -----------     -----------
          Total investment income                                            1,742,258         890,800
                                                                           -----------     -----------
Expenses:
     Management fee                                                            775,765         515,307
     Management incentive fee                                                        -          75,983
     Deferred management incentive fee                                               -       3,147,385
     Director fees and expenses                                                 44,950          45,007
     Professional fees                                                          29,231          84,962
     Administrative fees                                                        12,500          12,500
     Mailing, printing and other expenses                                       67,544          44,508
     Interest expense                                                          189,723          87,553
     Franchise taxes                                                             6,280           9,760
     Amortization                                                                   -            5,865
                                                                           -----------     -----------
          Total expenses                                                     1,125,992       4,028,830
                                                                           -----------     -----------
Net investment income (loss)                                                   616,266      (3,138,030)
                                                                           -----------     -----------
Realized gain (loss) on sales of portfolio securities, net                   6,288,021      (2,258,526)
                                                                           -----------     -----------
Unrealized appreciation of portfolio securities, net:
     End of period                                                          78,194,053      40,151,825
     Beginning of period                                                    84,464,151      21,776,460
                                                                           -----------     -----------
     Increase (decrease) in unrealized appreciation, net                    (6,270,098)     18,375,365
                                                                           -----------     -----------
     Total increase in net assets from operations                          $   634,189     $12,978,809
                                                                           ===========     ===========
</TABLE>
              The accompanying notes are an integral part of these
                              financial statements.

                                       2
<PAGE>
                             EQUUS II INCORPORATED
                            STATEMENTS OF OPERATIONS
             FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
                                  (Unaudited)
<TABLE>
<CAPTION>
                                                             1997               1996
                                                          ------------      ------------
<S>                                                       <C>               <C>         
Investment income:
     Income from portfolio securities                     $  3,121,712      $  2,175,097
     Interest from temporary cash investments                   76,660            57,867
                                                          ------------      ------------
          Total investment income                            3,198,372         2,232,964
                                                          ------------      ------------
Expenses:
     Management fee                                          2,072,441         1,332,137
     Management incentive fee                                   55,824         1,183,146
     Deferred management incentive fee                         426,501         5,926,301
     Director fees and expenses                                153,812           147,825
     Professional fees                                         356,575           174,042
     Administrative fees                                        37,500            37,500
     Mailing, printing and other expenses                      183,836           101,657
     Interest expense                                          415,495           526,722
     Franchise taxes                                           100,643            55,166
     Amortization                                               11,730            17,595
                                                          ------------      ------------
          Total expenses                                     3,814,357         9,502,091
                                                          ------------      ------------
Net investment loss                                           (615,985)       (7,269,127)
                                                          ------------      ------------
Realized gain on sales of portfolio securities, net          4,812,355         3,370,681
                                                          ------------      ------------
Unrealized appreciation of portfolio securities, net:
     End of period                                          78,194,053        40,151,825
     Beginning of period                                    41,671,464         7,975,268
                                                          ------------      ------------
     Increase in unrealized appreciation, net               36,522,589        32,176,557
                                                          ------------      ------------
     Total increase in net assets from operations         $ 40,718,959      $ 28,278,111
                                                          ============      ============
</TABLE>
              The accompanying notes are an integral part of these
                              financial statements.

                                       3
<PAGE>
                             EQUUS II INCORPORATED
                      STATEMENTS OF CHANGES IN NET ASSETS
             FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
                                  (Unaudited)
<TABLE>
<CAPTION>
                                                   1997               1996
                                               -------------      -------------
<S>                                            <C>                <C>           
Operations:

     Net investment loss                       $    (615,985)     $  (7,269,127)
     Realized gain on sales of portfolio
        securities, net                            4,812,355          3,370,681
     Increase in unrealized appreciation of
        portfolio securities, net                 36,522,589         32,176,557
                                               -------------      -------------

Increase in net assets from operations            40,718,959         28,278,111
                                               -------------      -------------
Capital transactions:

     Stock issued in payment of deferred
        management incentive fee                  11,210,529               --
     Dividends                                          --             (183,123)
     Proceeds from rights offering                      --           13,338,935
     Rights offering expenses                           --             (225,982)
                                               -------------      -------------
Increase in net assets from capital
   share transactions                             11,210,529         12,929,830
                                               -------------      -------------
Net increase in net assets                        51,929,488         41,207,941

Net assets at beginning of period                103,223,308         61,853,289
                                               -------------      -------------
Net assets at end of period                    $ 155,152,796      $ 103,061,230
                                               =============      =============
</TABLE>
              The accompanying notes are an integral part of these
                              financial statements.

                                       4
<PAGE>
                             EQUUS II INCORPORATED
                       STATEMENTS OF CHANGES IN CASH FLOWS
             FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
                                  (Unaudited)
<TABLE>
<CAPTION>
                                                                 1997               1996
                                                            -------------      -------------
<S>                                                         <C>                <C>          
Cash flows from operating activities:
     Interest and dividends received                        $   2,672,925      $   1,426,295
     Cash paid to management company, directors,
        bank and suppliers                                     (3,053,567)        (3,471,404)
                                                            -------------      -------------
        Net cash used by operating activities                    (380,642)        (2,045,109)
                                                            -------------      -------------
Cash flows from investing activities:
     Purchase of portfolio securities                         (22,561,092)       (18,021,986)
     Proceeds from sales of portfolio securities               15,773,791          7,736,537
     Principal payments from portfolio companies                3,206,728          8,400,000
     Advance to co-investor                                      (501,547)              --
                                                            -------------      -------------
        Net cash used by investing activities                  (4,082,120)        (1,885,449)
                                                            -------------      -------------
Cash flows from financing activities:
     Advances from bank                                       269,600,000        195,950,000
     Repayments to bank                                      (247,600,000)      (196,500,000)
     Proceeds from rights offering                                   --           13,338,935
     Rights offering expenses                                        --             (225,982)
     Dividend payments                                         (1,209,850)              --
                                                            -------------      -------------
        Net cash provided by financing activities              20,790,150         12,562,953
                                                            -------------      -------------
Net increase in cash and cash equivalents                      16,327,388          8,632,395

Cash and cash equivalents at beginning of period               69,129,290         60,239,861
                                                            -------------      -------------
Cash and cash equivalents at end of period                  $  85,456,678      $  68,872,256
                                                            =============      =============
</TABLE>
              The accompanying notes are an integral part of these
                              financial statements.

                                       5
<PAGE>
                             EQUUS II INCORPORATED
                       STATEMENTS OF CHANGES IN CASH FLOWS
             FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
                                  (Unaudited)
                                  (Continued)
<TABLE>
<CAPTION>
                                                                1997               1996
                                                            -------------      -------------
<S>                                                         <C>                <C>          
Reconciliation of increase in net assets from
     operations to net cash used by operating
     activities:

Increase in net assets from operations                      $  40,718,959      $  28,278,111

Adjustments to reconcile increase in net assets
     from operations to net cash used by
     activities:

     Realized gain on sale of portfolio securities, net        (4,812,355)        (3,370,681)
     Increase in unrealized appreciation, net                 (36,522,589)       (32,176,557)
     Accrued interest and dividends exchanged for
         portfolio securities                                    (991,962)          (435,679)
     Decrease (increase) in accrued interest receivable           466,515           (370,990)
     Amortization of commitment fee                                55,000             72,500
     Commitment fees paid                                         (75,000)           (70,000)
     Amortization of reorganization costs                          11,730             17,595
     Decrease in accounts payable                                 (42,223)          (197,732)
     Stock issued to management company in payment
        of deferred management incentive fee                   11,210,529               --
     Increase (decrease) in due to management company         (10,399,246)         6,208,324
                                                            -------------      -------------
Net cash used by operating activities                       $    (380,642)     $  (2,045,109)
                                                            =============      =============
</TABLE>
              The accompanying notes are an integral part of these
                              financial statements.

                                       6
<PAGE>
                              EQUUS II INCORPORATED
         SUPPLEMENTAL INFORMATI0N - SELECTED PER SHARE DATA AND RATIOS
              FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                               1997                1996
                                                                          -------------       -------------
<S>                                                                       <C>                 <C>          
Investment income                                                         $        0.68       $        0.60

Expenses                                                                           0.81                2.57
                                                                          -------------       -------------
     Net investment loss                                                          (0.13)              (1.97)

Realized gain (loss) on sale of portfolio securities, net                          1.02                0.91

Increase in unrealized appreciation of portfolio securities, net                   7.70                8.71
                                                                          -------------       -------------
     Increase in net assets from operations                                        8.59                7.65

Capital transactions:

     Dividend                                                                      --                 (0.04)
     Effect of rights offering                                                     --                 (2.69)
                                                                          -------------       -------------
     Net increase in net assets from capital transactions                          --                 (2.73)
                                                                          -------------       -------------
Net increase in net assets                                                         8.59                4.92

Net assets at beginning of period                                                 24.00               19.71
                                                                          -------------       -------------
Net assets at end of period                                               $       32.59       $       24.63
                                                                          =============       =============
Ratio of expenses to average net assets                                            2.95%              11.52%

Ratio of net investment loss to average net assets                                (0.48)%             (8.82)%

Ratio of increase in net assets from operations to average net assets             31.52%              34.29%

Average shares outstanding during period                                      4,740,016           3,696,034
</TABLE>
              The accompanying notes are an integral part of these
                              financial statements.

                                       7
<PAGE>
                             EQUUS II INCORPORATED
                       STATEMENTS OF PORTFOLIO SECURITIES
                               SEPTEMBER 30, 1997
                                  (Unaudited)
<TABLE>
<CAPTION>
                                                                      Date of
                       Portfolio Company                          Initial Investment    Cost          Fair Value
                       -----------------                          ------------------    ----          ----------

<S>                                                               <C>                  <C>             <C>
A. C. Liquidating Corporation                                     February 1985
  -4,885 shares of 10% Series C
   cumulative preferred stock                                                          $ 488,500       $        --
  -10% secured promissory notes                                                          188,014                --

Allied Waste Industries, Inc. (NASDAQ - AWIN)                       March 1989
  -1,234,584 shares of common stock                                                    4,499,340        22,903,076
  -Warrants to buy up to 125,000 shares of common
   stock at $5.00 per share through August 1999                                               --         1,156,016

American Residential Services, Inc. (NYSE - ARS)                  December 1995
  -1,125,000 shares of common stock                                                    3,000,272        19,040,910
  -Warrants to buy up to 100,000 shares of common
    stock at $15 per share through September 2001                                             --                --

Atlas Acquisition, Inc.                                              May 1997
  -32,000 shares of common stock                                                          32,000            32,000
  -19,680 shares of preferred stock                                                    1,968,000         1,968,000

Brazos Sportswear, Inc. (NASDAQ - BRZS)                           February 1989
  -2,160,308 shares of common stock                                                    1,331,187        13,339,902
  -3,862,887 shares of 8% Series B1 preferred stock                                    3,862,887         3,862,887
  -1,313,720 shares of 8% Series B2 preferred stock                                    1,313,720         1,313,720
  -1,075,719 shares of 8% Series B3 preferred stock                                    1,075,719         1,075,719
  -Warrants to buy up to 30,261 and 140,578 shares
   of common stock at $4.62 and $6.59 per share
    through August 2006 and March 2007, respectively                                          --            47,056
  -1,000 shares of common stock of GCS RE, Inc.                                          132,910           300,000

Carruth-Doggett Industries, Inc.                                  December 1995
  -10% senior subordinated promissory note                                             2,250,000         2,250,000
  -Warrant to buy up to 33,333 shares of common
   stock at $0.01 per share through December 2005                                             --         1,000,000
  -Warrant to buy up to 249 shares of common
   stock of CDE Corp. at $0.01 per share through
   December 2005                                                                              --                --
</TABLE>
              The accompanying notes are an integral part of these
                              financial statements.

                                       8
<PAGE>
                             EQUUS II INCORPORATED
                       STATEMENTS OF PORTFOLIO SECURITIES
                               SEPTEMBER 30, 1997
                                  (Unaudited)
                                  (Continued)
<TABLE>
<CAPTION>
                                                                        Date of
                        Portfolio Company                          Initial Investment         Cost              Fair Value
                        -----------------                          ------------------         ----              ----------
<S>                                                                  <C>                   <C>                <C>
Coach USA, Inc. (NYSE - CUI)                                          August 1996
  -143,112 shares of common stock                                                          $ 1,863,357        $ 4,173,235

Container Acquisition, Inc.                                          February 1997
  -1,370,000 shares of common stock                                                          1,370,000          1,370,000
  -47,790 shares of preferred stock                                                          4,779,000          4,779,000
  -Warrant to buy up to 370,588 shares of common
   stock at $.01 per share through February 2007                                                 1,000              1,000

CRC Holdings, Corp.                                                    June 1997
  -35,000 shares of common stock                                                             3,199,000          3,199,000
  -12% subordinated promissory note                                                            959,700            959,700

Drypers Corporation (NASDAQ - DYPR)                                    July 1991
  -1,096,892 shares of common stock                                                          6,400,132          6,705,718
  -25,000 shares of 7.5% convertible preferred stock                                         2,500,000         15,283,452
  -Warrants to buy up to 10,990 shares of common
   stock at $2.41 per share through June 1998                                                       --             30,216

Garden Ridge Corporation (NASDAQ - GRDG)                               July 1992
  -474,942 shares of common stock                                                              685,030          6,737,646

Healthcare Technology Delivery, Inc.                                   April 1997
  -9,000 shares of common stock                                                               50,000             50,000

Hot & Cool Holdings, Inc.                                             March 1996
  -9% increasing rate subordinated
   promissory note                                                                           1,300,000          1,300,000
  -10% subordinated note                                                                     1,500,000          1,500,000
  -Warrants to buy up to 14,942 shares of common
    stock at $.01 per share through March 2006                                                      --            280,000
</TABLE>
              The accompanying notes are an integral part of these
                              financial statements.

                                       9
<PAGE>
                             EQUUS II INCORPORATED
                       STATEMENTS OF PORTFOLIO SECURITIES
                               SEPTEMBER 30, 1997
                                  (Unaudited)
                                  (Continued)
<TABLE>
<CAPTION>
                                                                    Date of
                      Portfolio Company                         Initial Investment      Cost          Fair Value
                      -----------------                         ------------------      ----          ----------
<S>                                                                <C>               <C>               <C>
J & J Rental Service, Inc.                                         July 1997
  -10% subordinated promissory note                                                  $2,000,000        $2,000,000
  -Warrants to buy 22,500 and 10,715 shares
    of common stock for $.0129 and $.01 per
    share, respectively, through June 2007                                                    -                 -
  -Warrants to buy 22,500 and 10,715 shares of
    J & J Realty, Inc. common stock for $.0129 and
    $.01 per share, respectively, through June 2007                                           -                 -

NCI Building Systems, Inc. (NASDAQ - BLDG)                        April 1989
  -100,000 shares of common stock                                                       159,784         3,600,000

Paracelsus Healthcare Corporation (NYSE - PLS)                   December 1990
  -1,263,058 shares of common stock                                                   5,278,748         8,205,844

Raytel Medical Corporation (NASDAQ - RTEL)                        August 1997
  -33,073 shares of common stock                                                        330,730           378,851

Restaurant Development Group, Inc.                                 June 1987
  -610,909 shares of Class A common stock                                             2,891,156           800,000
  -Warrants to buy up to 62,500  shares of
   common stock at $3 per share through
   April 1998                                                                                 -                 -

Sovereign Business Forms, Inc.                                    August 1996
  -11,990 shares of preferred stock                                                   1,199,000         1,199,000
  -15% promissory note                                                                  550,000           550,000
  -Warrant to buy 551,894 shares of common
    stock at $1 per share through August 2006                                                 -                 -

Stephen L. LaFrance Holdings, Inc.                              September 1997
  -2,498,452 shares of preferred stock                                                2,498,452         2,498,452
  -Warrant to buy 269 shares of common stock
    for $.01 per share through September 2007                                                 -                 -
</TABLE>
              The accompanying notes are an integral part of these
                              financial statements.

                                       10
<PAGE>
                             EQUUS II INCORPORATED
                       STATEMENTS OF PORTFOLIO SECURITIES
                               SEPTEMBER 30, 1997
                                  (Unaudited)
                                  (Continued)
<TABLE>
<CAPTION>
                                                                 Date of
                     Portfolio Company                       Initial Investment       Cost            Fair Value
                     -----------------                       ------------------       ----            ----------
<S>                                                          <C>                   <C>                 <C>
Strategic Holdings, Inc.                                     September 1995
  -3,089,751 shares of common stock                                                $ 3,088,389         $ 3,088,389
  -3,822,157 shares of Series B preferred stock                                      3,820,624           3,820,624
  -Warrants to buy 225,000 and 100,000 shares of
    common stock at $0.4643 and $1.50 per share,
    respectively, through August 2005                                                        -             100,000
  -1,000 shares of SMIP, Inc. common stock                                             150,000             150,000
  -15% promissory note of SMIP, Inc.                                                   175,000             175,000

Summit/DPC Partners, L.P.                                     October 1995
  -36.11% limited partnership interest                                               2,600,000           2,600,000

Texrock Radio, Inc.                                             July 1997
  -10% promissory note                                                                 376,127             376,127

Travis International, Inc.                                    December 1986
  -66,784 shares of common stock                                                       534,589           1,502,640
  -104,500 shares of Class A common stock                                               25,701           2,351,250

Triad Medical Inc.                                             April 1997
  (formerly Avian Healthcare Corporation)
  -449,213 shares of common stock                                                      300,000             300,000
  -Prime + 1/2% promissory note                                                      1,116,728           1,116,728

VRPI Spin Off, Inc.                                           January 1988
  -100 shares of common stock                                                          250,000             300,000
  -10% secured promissory note                                                       2,672,349           2,672,349
  -12% secured promissory note                                                       1,050,000           1,050,000
  -10,000 shares of common stock of
   Equus Video Corporation                                                              25,000              20,000

</TABLE>
              The accompanying notes are an integral part of these
                              financial statements.

                                       11
<PAGE>
                             EQUUS II INCORPORATED
                       STATEMENTS OF PORTFOLIO SECURITIES
                               SEPTEMBER 30, 1997
                                  (Unaudited)
                                  (Continued)
<TABLE>
<CAPTION>
                                                             Date of
                   Portfolio Company                     Initial Investment      Cost            Fair Value
                   -----------------                     ------------------      ----            ----------
<S>                                                       <C>                 <C>               <C>
WMW Industries, Inc.                                      October 1989
  (formerly Williams & Mettle Co.)
  -530,035 shares of common stock                                             $ 1,024,309         $ 1,360,469
  -12% subordinated promissory note                                               893,883             893,883
  -Junior participation in prime + 1.5% note                                    1,012,576           1,012,576
  -Warrant to buy 72,672 shares of common stock
   at $0.01 per share through December 1999                                            -              186,531
                                                                              -----------       -------------
     Total                                                                    $78,772,913       $ 156,966,966
                                                                              ============      =============
</TABLE>
       Substantially all of the Fund's portfolio securities are restricted from
public sale without prior registration under the Securities Act of 1933. The
Fund negotiates certain aspects of the method and timing of the disposition of
the Fund's investment in each portfolio company, including registration rights
and related costs.

       In connection with the investments in Allied Waste Industries, Inc.,
American Residential Services, Inc., Atlas Acquisition, Inc., Brazos Sportswear,
Inc., Coach USA, Inc., CRC Holdings, Corp., Drypers Corporation, Healthcare
Technology Delivery, Inc., Hot & Cool Holdings, Inc., Paracelsus Healthcare
Corporation, Sovereign Business Forms, Inc., Strategic Holdings, Inc. and Triad
Medical Inc., rights have been obtained to demand the registration of such
securities under the Securities Act of 1933, providing certain conditions are
met. The Fund does not expect to incur significant costs, including costs of any
such registration, in connection with the future disposition of its portfolio
securities.

       As defined in the Investment Company Act of 1940, the Fund is considered
to have a controlling interest in A.C. Liquidating Corporation, Atlas
Acquisition, Inc., Brazos Sportswear, Inc., Container Acquisition, Inc., CRC
Holdings, Corp., Drypers Corporation, Restaurant Development Group, Inc.,
Strategic Holdings, Inc., Video Rental of Pennsylvania, Inc. and WMW Industries,
Inc. In addition, Healthcare Technology Delivery, Inc. and Travis International,
Inc. are considered to be affiliated entities of the Fund. The fair values of
the Fund's investments in publicly traded securities include discounts from the
closing market prices to reflect the estimated effects of restrictions on the
sale of such securities at September 30, 1997. Such discounts, shown in the
following table, total $17,572,677 or $3.69 per share as of September 30, 1997.

              The accompanying notes are an integral part of these
                              financial statements.

                                       12
<PAGE>
                            EQUUS II INCORPORATED
                       SCHEDULE OF PORTFOLIO SECURITIES
                              SEPTEMBER 30, 1997
                                  (Unaudited)
                                  (Continued)

                                                      Discount from
                                                      Market Value
                                                      ------------
                  Allied Waste Industries, Inc.        $ 1,317,952
                  American Residential Services, Inc.      896,590
                  Brazos Sportswear, Inc.                7,692,724
                  Coach USA, Inc.                          129,069
                  Drypers Corporation                    6,591,692
                  Garden Ridge Corporation                 208,381
                  Paracelsus Healthcare Corporation        635,562
                  Raytel Medical Corporation               100,707
                                                       -----------
                        Total discount                 $17,572,677
                                                       ===========

       Income was earned in the amount of $1,570,687 and $1,408,950 for the nine
months ended September 30, 1997 and 1996, respectively, on portfolio securities
of companies in which the Fund has a controlling interest.

      As defined in the Investment Company Act of 1940, all of the Fund's
investments are in eligible portfolio companies. The Fund provides significant
managerial assistance to all of the portfolio companies in which it has
invested, except Coach USA, Inc., Paracelsus Healthcare Corporation, Raytel
Medical Corporation and Summit/DPC Partners, L.P.  The Fund provides significant
managerial assistance to portfolio companies that comprise 90% of the total
value of the investments in portfolio companies at September 30, 1997.

              The accompanying notes are an integral part of these
                              financial statements.

                                       13
<PAGE>
                             EQUUS II INCORPORATED
                         NOTES TO FINANCIAL STATEMENTS
                          SEPTEMBER 30, 1997 AND 1996
                                  (Unaudited)

(1)   ORGANIZATION AND BUSINESS PURPOSE

      Equus II Incorporated (the "Fund"), a Delaware corporation with perpetual
existence, was formed by Equus Investments II, L.P. (the "Partnership") on
August 16, 1991. On July 1, 1992, the Partnership was reorganized and all of the
assets and liabilities of the Partnership were transferred to the Fund in
exchange for shares of common stock of the Fund. The shares of the Fund trade on
the American Stock Exchange under the symbol EQS.

      The Fund seeks to achieve capital appreciation by making investments in
equity and equity-oriented securities issued by privately-owned companies in
transactions negotiated directly with such companies. The Fund seeks to invest
primarily in companies which intend to acquire other businesses, including
leveraged buyouts. The Fund may also invest in recapitalizations of existing
businesses or special situations from time to time. The Fund's investments in
Portfolio Companies consist principally of equity securities such as common and
preferred stock, but also include other equity-oriented securities such as debt
convertible into common or preferred stock or debt combined with warrants,
options or other rights to acquire common or preferred stock. Current income is
not a significant factor in the selection of investments. The Fund has elected
to be treated as a business development company under the Investment Company Act
of 1940, as amended.

(2)   MANAGEMENT

      The Fund has entered into a management agreement with Equus Capital
Management Corporation, a Delaware corporation (the "Management Company").
Pursuant to such agreement, the Management Company performs certain services,
including certain management and administrative services necessary for the
operation of the Fund. The Management Company receives a management fee at an
annual rate of 2% of the net assets of the Fund, paid quarterly in arrears. The
Management Company also receives compensation for providing certain investor
communication services, of which $37,500 is included in the accompanying
Statements of Operations for the nine months ended September 30, 1997 and 1996.

      Through March 31, 1997, the Management Company also received or reimbursed
a management incentive fee equal to 20% of net realized capital gains less
unrealized capital depreciation, computed on a cumulative basis over the life of
the Fund. The management incentive fee was paid or reimbursed quarterly in
arrears. Pursuant to the vote of the stockholders at a special meeting held on
April 9, 1997 ("Special Meeting"), the Fund entered into a new management
agreement with the Management Company. The only significant change from the
previous management agreement was the elimination of incentive fees based on
capital gains effective as of April 1, 1997.

      Included in "Deferred management incentive fees" in the accompanying
Balance Sheet was $10,784,028 of accrued management incentive fees at December
31, 1996. Such fees were calculated on the unrealized appreciation of
investments in portfolio securities, and were to be paid only when 

                                       14
<PAGE>
such appreciation was realized. However, pursuant to the vote of the
stockholders at the Special Meeting, the deferred incentive fee, which had
increased to $11,210,529 at March 31, 1997, was paid on May 15, 1997, by the
issuance to the Management Company of 459,973 unregistered shares of common
stock of the Fund. The number of shares issued was determined by dividing the
deferred incentive fee by $24.37 per share, the net asset value per share at
March 31, 1997. Deferred management incentive fee expense for the nine months
ended September 30, 1997 and 1996 totaled $426,501 and $5,926,301, respectively.
The deferred management incentive fee was reflected as an expense of the Fund
when there was an increase in the Fund's unrealized appreciation of portfolio
securities and was reflected as a reduction in expense to the Fund when there
was a decrease in the Fund's appreciation of portfolio securities. At December
31, 1996, $125,135 of incentive fees to be reimbursed by the Management Company
to the Fund are netted in "Due to Management Company" against $516,117 of
management fees due to the Management Company.

      The Management Company is controlled by a privately-owned corporation.

      As compensation for services rendered to the Fund, each director who is
not an officer of the Fund receives an annual fee of $20,000 paid quarterly in
arrears, a fee of $2,000 for each meeting of the Board of Directors attended in
person, a fee of $1,000 for participation in each telephonic meeting of the
Board of Directors and for each committee meeting attended ($500 for each
committee meeting if attended on the same day as a Board Meeting), and
reimbursement of all out-of-pocket expenses relating to attendance at such
meetings. In addition, each director who is not an officer of the Fund will be
granted incentive stock options to purchase shares of the Fund's stock from time
to time. See Note 10. Certain officers and directors of the Fund serve as
directors of Portfolio Companies, and receive and retain fees in consideration
for such service.

(3)   SIGNIFICANT ACCOUNTING POLICIES

      Interim Financial Statements - The financial statements included herein
have been prepared without audit and include all adjustments which management
considers necessary for fair presentation.

      Valuation of Investments - Portfolio investments are carried at fair value
with the net change in unrealized appreciation or depreciation included in the
determination of net assets. Investments in companies whose securities are
publicly traded are valued at their quoted market price, less a discount to
reflect the estimated effects of restrictions on the sale of such securities
("Valuation Discount"), if applicable. Cost is used to approximate fair value of
other investments until significant developments affecting an investment provide
a basis for use of an appraisal valuation. Thereafter, portfolio investments are
carried at appraised values as determined quarterly by the Management Company,
subject to the approval of the Board of Directors. The fair market values of
debt securities, which are generally held to maturity, are determined on the
basis of the terms of the debt securities and the financial condition of the
issuer. Because of the inherent uncertainty of the valuation of portfolio
securities which do not have readily ascertainable market values, $160,566,966
(including $101,601,922 in publicly-traded securities, net of a $17,572,677
Valuation Discount) and $107,604,488 (including $58,079,167 in publicly-traded
securities, net of a $15,599,614 Valuation Discount) at September 30, 1997 and
December 31, 1996, respectively, the Management Company's estimate of fair value
may significantly differ from the fair value that would have been used had a
ready market existed for the securities. Appraised values do not reflect
brokers' fees or other normal selling costs which might become payable on
disposition of such investments.

                                       15
<PAGE>
      On a weekly basis, the Fund adjusts its net asset value for changes in the
value of its publicly held securities and material changes in the value of its
private securities and reports those amounts to Lipper Analytical Services, Inc.
Such weekly net asset values appear in various publications, including BARRON'S
and THE WALL STREET JOURNAL.

      Investment Transactions - Investment transactions are recorded on the
accrual method. Realized gains and losses on investments sold are computed on a
specific identification basis.

      Cash Flows - For purposes of the Statements of Cash Flows, the Fund
considers all highly liquid temporary cash investments purchased with an
original maturity of three months or less to be cash equivalents.

      Income Taxes - No provision for Federal income taxes has been made in the
accompanying financial statements as the Fund has qualified for pass-through
treatment as a "regulated investment company" under Subchapter M of the Internal
Revenue Code of 1986. As such, all net income is allocable to the stockholders
for inclusion in their respective tax returns. Net capital losses are not
allocable to the shareholders but can be carried over to offset future earnings
of the Fund.

(4)   BOOK TO TAX RECONCILIATION

      The Fund accounts for dividends in accordance with Statement of Position
93-2 which relates to the amounts distributed by the Fund as net investment
income or net capital gains, which are often not equal to the corresponding
income or gains shown in the Fund's financial statements. The Fund had net
investment losses for tax purposes for the nine months ended September 30, 1997
and 1996, and therefore has no net investment income to distribute. The
following is a reconciliation of the difference in the Fund's net realized
capital gain on the sale of portfolio securities for book and tax purposes for
the nine months ended September 30, 1997 and 1996, respectively.

                                                  1997             1996     
                                               -----------      -----------
      Net realized gain on sale of portfolio
        securities, book                       $ 4,812,355      $ 3,370,681
      Management incentive fee                  (7,530,385)      (1,183,146)
                                               -----------      -----------
      Net realized gain (loss) on sale of
        portfolio securities, tax              $(2,718,030)     $ 2,187,535
                                               ===========      ===========

(5)   DIVIDENDS

      The Fund declared no dividends during the nine months ended September 30,
1997 and 1996. The Fund has adopted a policy to make dividend distributions of
at least $0.50 per share on an annual basis. In the event that taxable income,
including realized capital gains, exceeds $0.50 per share in any year,
additional dividends may be declared to distribute such excess. Distributions
can be made by the Fund either in the form of a cash distribution or a stock
dividend. The Fund has not adopted any set policy concerning whether dividends
will be paid only in cash, or in stock or cash by specific election. If the Fund
does not have available cash to pay the minimum dividends, it may borrow the
required funds or sell some of its portfolio investments. 

                                       16
<PAGE>
(6)   TEMPORARY CASH INVESTMENTS

      Temporary cash investments, which represent the short-term utilization of
cash prior to investment in securities of portfolio companies, distributions to
the shareholders or payment of expenses, consist of money market accounts
earning interest at rates ranging from 3.50% to 4.84% at September 30, 1997.
Substantially all of the Fund's temporary cash investments were invested at
NationsBank of Texas, N.A. at September 30, 1997 and December 31, 1996.

(7)   PORTFOLIO SECURITIES

      During the nine months ended September 30, 1997, the Fund invested
$19,161,738 in nine new companies and made follow-on investments of $4,722,046
in six portfolio companies, including $991,962 in accrued interest and dividends
received in the form of additional portfolio securities and $330,730 in
securities received upon the sale of securities of another portfolio company. In
addition, the Fund realized a net capital gain of $4,812,355 during the nine
months ended September 30, 1997.

      During the nine months ended September 30, 1996, the Fund invested
$9,800,000 in three new companies and made follow-on investments of $9,407,665
in nine portfolio companies, including $435,679 in dividends and accrued
interest received in the form of additional portfolio securities and $750,000 of
common stock received through the net exercise of common stock warrants. In
addition, the Fund realized net capital gains of $3,370,681 during the nine
months ended September 30, 1996.

(8)   DEFERRED REORGANIZATION COSTS

      The Fund paid $117,300 in expenses related to the formation of the Fund
and was amortized over 5 years. Accumulated amortization of such expenses
totaled $117,300 and $105,570 at September 30, 1997 and December 31, 1996,
respectively.

(9)   NOTES PAYABLE TO BANK

      The Fund has a $150,000,000 line of credit promissory note with
NationsBank of Texas, N.A., with interest payable at 1% over the rate earned in
its money market account. The Fund had $85,000,000 and $65,000,000 outstanding
on such note at September 30, 1997 and December 31, 1996, that was secured by
$85,000,000 and $65,000,000 of the Fund's temporary cash investments. The Fund
paid a $50,000 commitment fee in 1996, which was capitalized and was amortized
over the commitment period. The note originally matured on April 4, 1997. On
March 28, 1997, the note was extended to April 1, 1998, and in April 1997, the
Fund paid a $75,000 commitment fee in connection with such extension which was
capitalized and is being amortized over the commitment period.

      The Fund has a $30,000,000 revolving line of credit with NationsBank of
Texas, N.A. that expires on April 1, 1998. The Fund had $2,300,000 and $300,000
outstanding under such line of credit at September 30, 1997 and December 31,
1996, respectively, which is secured by the Fund's investments in portfolio
securities. The Fund paid a $20,000 commitment fee in connection with such loan
which was capitalized and was amortized over the commitment period which ended
April 4, 1997. The outstanding balance on the loan bears interest at prime +
1/4% to 3/4%. The fund also pays 1/4% interest on the unused portion of the line
of credit.

      The average  daily  balances  outstanding  on the Fund's  notes  payable
during the nine months ended  September 30, 1997 and 1996, were $4,508,681 and
$7,215,345, respectively.

                                       17
<PAGE>
(10)  STOCK OPTION PLAN

      The Fund held a special meeting of shareholders on April 9, 1997. At the
meeting, shareholders approved the Equus II Incorporated 1997 Stock Incentive
Plan ("Stock Incentive Plan") which authorizes the Fund to issue options to the
directors and officers of the Fund in an aggregate amount of up to 20% of the
outstanding shares of common stock of the Fund. Implementation of this plan was
subject to the receipt of an exemptive order from the Securities and Exchange
Commission ("SEC"), which was received on May 8, 1997. On May 9, 1997, the
Compensation committee of the Board of Directors of the Fund issued options to
the officers of the Fund to buy up to 830,136 shares of the Fund's common stock
at $17 per share. On July 1, 1997, the Compensation Committee issued options to
the officers of the Fund to buy up to 66,995 shares of the Fund's common stock
at $21.3125 per share.

      Under the 1997 Stock Incentive Option Plan, options to purchase 897,131
shares of the Fund's common stock at prices ranging $17 to $21.3125 per share
were outstanding at September 30, 1997. Options to purchase 364,381 shares of
common stock were exercisable at September 30, 1997 or within 60 days
thereafter. During the nine months ended September 30, 1997, no options were
exercised. Outstanding options expire in May 2007 and July 2007. If all options
granted, were exercised as of September 30, 1997, there would have been dilution
of net assets per share of approximately $1.74 per share, or 5.4%, arising from
such exercise.

      The Stock Incentive Plan also provides that each director who is not an
officer of the Fund be granted a incentive stock option to purchase 5,000 shares
of the Fund's common stock. In addition, beginning with the 1998 annual meeting
of shareholders, each director who is not an officer of the Fund will, on the
first business day following the annual meeting, be granted a nonqualified stock
option to purchase 2,000 shares of the Fund's common stock. The initial 30,000
options were issued upon the approval of such provisions by the SEC, which was
received on November 4, 1997.

(11)  RIGHTS OFFERING

      On March 5, 1996, the Fund filed a registration statement with the
Securities and Exchange Commission for a rights offering. Under the rights
offering, the Fund issued each shareholder or record as of April 10, 1996, one
right for each share owned. One share of common stock could be acquired for
every three rights. The exercise price for shares in the rights offering was
$12.75 per share, a 19.7% discount from the market price on April 10, 1996. On
May 8, 1996, the Fund completed its rights offering, which was over-subscribed.
The Fund issued a total of 1,046,191 shares at $12.75 per share and raised
$13,112,953, net of $225,982 in expenses. The proceeds from the rights offering
were used to repay debt and to fund the commitments the Fund had made for new
and follow-on investments.

(12)  COMMITMENTS AND CONTINGENCIES

      The Fund has made commitments to invest, under certain circumstances, up
to an additional $565,500 in GCS RE, Inc., $700,000 in Hot & Cool Holdings,
Inc., $2,250,000 in Sovereign Business Forms, Inc., $3,250,000 in Texrock Radio,
Inc. and $1,083,272 in Triad Medical Inc. In connection with its commitment to
GCS RE, Inc., the Fund has committed to a bank to maintain at least $380,000 in
temporary cash investments to fund such commitment. In addition, the Fund has
committed to invest up to $10,250,000 in three new companies.

                                       18
<PAGE>
      On April 1, 1996, two stockholders of the Fund filed an action in federal
district court in Houston, Texas against the directors of the Fund, the
Management Company, and the Fund. In essence, their suit alleged that by
approving the rights offering which was announced in March 1996, the Management
Company and the directors of the Fund violated their fiduciary duties to the
Fund's stockholders under the Investment Company Act of 1940 and Delaware common
law. They also alleged that the Management Company aided and abetted these
breaches of fiduciary duty. The plaintiffs moved the court to certify their suit
as a class action on behalf of all stockholders of the Fund. The court dismissed
their suit in December 1996, but the plaintiffs have made substantially similar
claims in an amended shareholder derivative action which they filed in January
1997. The plaintiffs have not specified the amount of any damages in either
suit. The plaintiffs have not yet made any demand on the Fund that its directors
take action regarding their derivative suit. In any event, management of the
Fund believes that the ultimate resolution of the plaintiffs' claims will not
have a material adverse effect on the Fund's financial position or results of
operations. During the nine months ended September 30, 1997 and the year ended
December 31, 1996, the Fund incurred $44,797 and $92,336, respectively, in legal
expenses related to such action.

      The Fund and certain of the portfolio companies are involved in asserted
claims and have the possibility for unasserted claims which may ultimately
affect the fair value of the Fund's portfolio investments. In the opinion of
Management, the financial position or operating results of the Fund will not be
materially affected by these claims.

(13)  SUBSEQUENT EVENTS

      Subsequent to September 30, 1997, the Fund repaid a net $85,800,000 of
notes payable to the bank.

      In October 1997, the Fund, in connection with its commitments in Note 12
also, advanced an additional $374,186 under a 10% promissory note to Texrock
Radio, Inc., in connection with a pending investment in the radio industry.

      On October 24, 1997, the Fund, exercised its warrants to buy 33,215 shares
of common stock of J & J Rental Services, Inc. ("J & J") for $397. J & J was
then merged into United Rentals, Inc., and the Fund received a contingent
payment obligation of up to approximately $840,000 and stock valued at
approximately $975,000 from the merged companies. In addition, the Fund received
payment in full of its $2,000,000 subordinated promissory note to J & J.

      On October 17, 1997, the Fund, in connection with its commitment in Note
12 above, deposited $644,700 into an escrow account in connection with its
pending investment in Tulsa Industries, Inc., a manufacturer of equipment for
the oil and gas industry.

      In October 1997, the Fund, in connection with its commitment in Note 12
above, made additional investments by advancing $250,000 and $200,000 to
Sovereign Business Forms, Inc. and Hot & Cool Holdings, Inc., respectively,
under subordinated promissory notes.

      In October 1997, the Fund received $501,548, which was included in
Accounts receivable at September 30, 1997. Such receivable represented an
advance to a co-investor in the Steven L. LaFrance Holdings, Inc.
investment.

                                       19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

LIQUIDITY AND CAPITAL RESOURCES

      Equus II Incorporated (the "Fund"), a Delaware corporation and business
development company, was formed as a successor to Equus Investments II, L.P. The
Fund has qualified for pass-through tax treatment as a "regulated investment
company" under Subchapter M of the Internal Revenue Code of 1986 each year since
its organization. The Fund's shares of common stock are listed for trading on
the American Stock Exchange, under the symbol "EQS".

      The Fund held a special meeting of shareholders on April 9, 1997. At the
meeting, shareholders approved a new management agreement between the Fund and
the Management Company. The shareholders also authorized the payment by the Fund
at March 31, 1997, to the Management Company of the deferred incentive fee on
the balance sheet of the Fund at March 31, 1997, in shares of the Fund's common
stock valued at net asset value at March 31, 1997, and approved the Equus II
Incorporated 1997 Stock Incentive Plan which authorizes the Fund to issue stock
options to its directors and officers in an aggregate amount up to 20% of the
outstanding shares of common stock of the Fund. Implementation of these
proposals was subject to the receipt of an exemptive order from the Securities
and Exchange Commission, which was received on May 8, 1997. On May 15, 1997, the
Fund issued 459,973 unregistered shares of common stock of the Fund, in payment
of all deferred incentive fees due to the Management Company as of March 31,
1997. The number of shares issued was determined by dividing the deferred
incentive fee by $24.37 per share, the net asset value at March 31, 1997.

      At September 30, 1997, the Fund had $156,966,966 of its assets invested in
portfolio securities of 27 companies, and has committed to invest up to an
additional $7,848,772 in five of such companies and $10,250,000 in three new
companies under certain conditions. Management believes current temporary cash
investments, anticipated future investment income, proceeds from borrowings and
proceeds from the sale of existing portfolio securities are sufficient to
finance these commitments. At September 30, 1997, the Fund had $2,300,000
outstanding on a $30,000,000 revolving line of credit loan from a bank.

      Net cash used by operating activities was $380,642 and $2,045,109 for the
nine months ended September 30, 1997 and 1996, respectively. An increase in
interest and dividends received from portfolio companies in 1997 accounted for
the majority of the decrease in cash used by operating activities.

      At September 30, 1997, the Fund had $85,456,678 of its total assets of
$243,394,568 invested in temporary cash investments consisting of money market
securities. This amount includes proceeds of $85,000,000 from a $150,000,000
revolving line of credit with a bank that is utilized to enable the Fund to
achieve adequate diversification to maintain its pass-through tax status as a
regulated investment company. Such amount was repaid to the bank on October 1,
1997.

      The Fund has the ability to borrow funds and issue forms of indebtedness,
subject to certain restrictions. Net investment income and net realized gains
from the sales of portfolio investments are intended to be distributed at least
annually, to the extent such amounts are not reserved for payment of
contingencies or to make follow-on or new investments.

                                       20
<PAGE>
      The Fund reserves the right to retain net long-term capital gains in
excess of net short-term capital losses for reinvestment or to pay contingencies
and expenses. Such retained amounts, if any, will be taxable to the Fund as
long-term capital gains and shareholders will be able to claim their
proportionate share of the federal income taxes paid by the Fund on such gains
as a credit against their own federal income tax liabilities. Stockholders will
also be entitled to increase the adjusted tax basis of their Fund shares by the
difference between their undistributed capital gains and their tax credit.

RESULTS OF OPERATIONS

INVESTMENT INCOME AND EXPENSE

      Net investment loss after all expenses amounted to $615,985 and $7,269,127
for the nine months ended September 30, 1997 and 1996, respectively. The large
net investment loss in 1996 was primarily attributable to the accrual of
$1,183,146 in management incentive fees related to the realized gains from the
sales of portfolio securities of $3,370,681 and $5,926,301 in deferred
management incentive fees related to the increase in the net unrealized
appreciation of portfolio securities of $32,176,557 in 1996. Income from
portfolio securities increased to $3,198,372 in 1997 as compared to $2,175,097
in 1996, due to the increase in dividend income received and amounts invested in
interest-bearing portfolio securities during 1997 as compared to 1996.

      Professional fees increased from $174,042 during the nine months ended
September 30, 1996, to $356,575 during the nine months ended September 30, 1997,
and Mailing, printing and other expenses increased from $101,657 during the nine
months ended September 30, 1996, to $183,836 during the nine months ended
September 30, 1997. Such increases were primarily due to the costs associated
with the Special Meeting of Stockholders held on April 9, 1997. The costs
included the independent third party appraisal of the Fund's investments in
portfolio securities and the printing and mailing of the proxy as well as the
amended proxy.

      Interest expense decreased to $415,495 in 1997 as compared to $526,722 in
1996, due to the decrease of the average daily balances outstanding on the lines
of credit to $4,508,681 for the nine months ended September 30, 1997, from
$7,215,345 in 1996.

      The Management Company receives management fee compensation at an annual
rate of 2% of the net assets of the Fund. Such fees amounted to $2,072,441 and
$1,332,137 for the nine months ended September 30, 1997 and 1996, respectively.
The increase in 1997 is due to the $40,718,959 increase in net assets from
operations during the nine months ended September 30, 1997 and the $11,210,529
increase in net assets from the issuance of common stock in payment of the
deferred management incentive fee.

      The Management Company also received or reimbursed a management incentive
fee equal to 20% of net realized capital gains less unrealized capital
depreciation, computed on a cumulative basis over the life of the Fund.
Management incentive fees of $55,824 and $1,183,146 were accrued during the nine
months ended September 30, 1997 and 1996, respectively. Deferred management
incentive fee expense for the nine months ended September 30, 1997 and 1996
totaled $426,501 and $5,926,301, respectively. Pursuant to the vote of the
stockholders at a special meeting held on April 9, 1997 ("Special Meeting"), the
Fund entered into a new management agreement with the Management Company which
eliminated incentive fees based on capital gains. The deferred management
incentive fee was reflected as an expense of the Fund when there 

                                       21
<PAGE>
was an increase in the Fund's unrealized appreciation of portfolio securities
and was reflected as a reduction in expense to the Fund when there was a
decrease in the Fund's appreciation of the portfolio securities. The deferred
management incentive fees were not paid until such appreciation was realized.
However, pursuant to the vote of the stockholders at the Special Meeting, the
deferred incentive fee of $11,210,529 at March 31, 1997, was paid on May 15,
1997 by the issuance of 459,973 unregistered shares of common stock of the Fund.
The number of shares issued was determined by dividing the deferred incentive
fee by $24.37 per share, the net asset value per share at March 31, 1997.

REALIZED GAINS AND LOSSES ON SALES OF PORTFOLIO SECURITIES

      During the nine months ended September 30, 1997 the Fund had net realized
gains of $4,812,355 from the sale of investments in three portfolio companies.
The Fund sold 116,865 shares of Allied Waste Industries, Inc. ("AWIN") for
$1,600,678 realizing a net capital gain of $990,210, sold 96,035 shares of
American Residential Services, Inc. for $2,186,926 realizing a net capital gain
of $2,130,098, sold its investment in Industrial Equipment Rental, Inc. for
$6,646,244 realizing a net capital gain of $4,279,544, sold its investment in
Midway Airlines for $271,000 realizing a net capital loss of $3,943,226, and
sold its investment in David's Supermarkets for $5,546,800 realizing a net
capital gain of $1,477,350. In August 1997, the Fund sold its investment in
Cardiovascular Ventures, Inc. to Raytel Medical Corporation ("Raytel") receiving
cash proceeds of $2,170,891 and 33,073 shares of common stock, valued at
$330,730, of Raytel. The Fund recognized a capital loss of $121,621 on such
sale.

      During the nine months ended September 30, 1996, the Fund realized net
capital gains of $3,370,681 from the sale or disposition of securities of six
portfolio companies. The Fund sold 233,044 shares of AWIN common stock for
$1,563,678, realizing a capital gain of $461,919, exchanged 25,571 shares of
Enterprises Holding Company preferred stock for $1,173,598 in cash and 238,933
shares of American Residential Services, Inc. common stock, realizing a capital
gain of $1,173,598, sold 96,000 shares of Garden Ridge Corporation common stock,
realizing a capital gain of $4,343,372, sold 32,789 shares of Tech-Sym
Corporation for $1,029,901, realizing a capital gain of $911,656 and exchanged
$5,083,083 of notes receivable from Yellow Cab Service Corporation and $63,601
in cash for 71,440 shares of Coach USA, Inc. common stock, valued at $1,714,560,
realizing a capital loss of $3,432,124. In addition, the Fund realized a capital
loss of $87,740 on its investment in Sports & Leisure, Inc., which filed for
Chapter 11 bankruptcy during February 1996.

UNREALIZED APPRECIATION AND DEPRECIATION OF PORTFOLIO SECURITIES

      Net unrealized appreciation of investments increased $36,522,589 during
the nine months ended September 30, 1997, from $41,671,464 to $78,194,053. Such
net increase resulted from increases in the estimated fair value of securities
of thirteen of the Fund's portfolio companies aggregating $40,297,383, a
decrease in the estimated fair value of securities of two portfolio companies of
$4,385,495 and the transfer of $610,701 in net unrealized depreciation to net
realized losses.

      Net unrealized appreciation of investments increased $32,176,557 during
the nine months ended September 30, 1996, from $7,975,268 to $40,151,825. Such
net increase resulted from increases in the estimated fair value of securities
of ten of the Fund's portfolio companies aggregating $35,323,661, the decrease
in the estimated fair value of the securities of three of the Fund's portfolio
companies aggregating $3,433,992 and the transfer of $286,888 in net unrealized
depreciation to net realized gains from the sale of investments in three
companies.

                                       22
<PAGE>
DIVIDENDS

      The Fund declared no dividends during the nine months ended September 30,
1997 and 1996.

PORTFOLIO INVESTMENTS

      During the nine months ended September 30, 1997, the Fund invested
$19,161,738 in nine new companies and made follow-on investments of $4,722,046
in six portfolio companies, including $991,962 in accrued interest and dividends
received in the form of additional portfolio securities and the $330,730 in
Raytel stock received from the sale of Cardiovascular Ventures, Inc. discussed
above. In addition, the Fund realized a net capital gain of $4,812,355 during
the nine months ended September 30, 1997.

      In January 1997, the Fund rolled its $763,747, 12% subordinated promissory
note along with $130,136 of accrued interest due from WMW Industries, Inc. into
a new $893,883, 12% subordinated promissory note.

      In February 1997, the Fund acquired 1,370,000 shares of common stock and
45,100 shares of preferred stock of Container Acquisition, Inc. ("CAI") for
$1,370,000 and $4,510,000, respectively. In addition, the Fund paid $1,000 for
warrants to buy 370,588 shares of common stock for $.01 per share through
February 2007. CAI is a logistics and maintenance services company serving
owners of international shipping containers. Through September 30, 1997, the
Fund received an additional 2,690 shares of preferred stock of CAI in payment
for $269,000 of dividends on the preferred stock.

      In February 1997, the Fund acquired an additional 3,500 shares of
preferred stock of Sovereign Business Forms, Inc. ("Sovereign") for $350,000,
which allowed Sovereign to acquire its third company in the business forms
manufacturing business. In August 1997, the Fund received an additional 990
shares of Sovereign preferred stock in payment of $99,000 in dividends.

      In March 1997, the Fund acquired 1,030,000 shares of Series B3 preferred
stock of BSI Holdings, Inc. ("BSI") for $1,030,000, and received warrants to
acquire 18,540 shares of BSI common stock for $50 per share. Such investment
allowed BSI to complete its merger into Sun Sportswear, Inc., a publicly traded
company. In conjunction with the merger of BSI into Sun, the combined company
was renamed Brazos Sportswear, Inc. ("Brazos") and trades on the NASDAQ National
Market under the symbol BRZS. In exchange for each share of common stock of BSI,
the Fund received 7.5824504 shares of Brazos common stock, its preferred stocks
of BSI were exchanged for similar preferred stocks of Brazos, and its warrants
were adjusted to reflect the exchange ratio used in the merger. In addition,
through September 30, 1997, the Fund has received an additional 334,387, 113,720
and 45,719 shares of Series B1, B2 and B3 preferred stock, respectively, in
payment of $493,826 in dividends on the preferred stock.

      In March 1997, the Fund advanced $250,000 to Hot & Cool Holdings, Inc. in
exchange for a 10% subordinated promissory note to allow Hot & Cool to acquire
additional equipment. In April 1997, the Fund advanced $850,000 to Hot & Cool
Holdings, Inc. in the form of a 10% promissory note and received warrants to buy
8,729 shares of Hot & Cool Holdings, Inc. common stock for $27.28 per share.

      In April 1997, the Fund advanced $1,250,000 to Cardiovascular Ventures,
Inc. in the form of a 10% promissory note and invested $84 in warrants to buy
83,956 shares of Cardiovascular Ventures, 

                                       23
<PAGE>
Inc. ("CVI") common stock for $3 per share. Such note was repaid in conjunction
with the sale of CVI in August 1997.

      In April 1997, the Fund acquired 9,000 shares of common stock and 4,500
shares of 8% preferred stock of Healthcare Technology Delivery, Inc. ("HTD") for
$50,000 and $450,000, respectively. HTD was formed to acquire FutureTech, Inc.
and Medical Companies Alliance, Inc. In addition, the Fund acquired 300,000
shares of convertible preferred stock of Triad Medical Inc. ("Triad") for
$300,000 and advanced $1,116,728 to Triad under a $2,200,000 prime + 1/2%
promissory note. Such preferred stock was converted in September 1997 into
449,213 shares of common stock of Triad. Triad was formed to create a national
leader in the contract sales and distribution of specialty medical products
designed for the hospital and alternate site health care markets, including
sub-acute care facilities, home care companies and specialty physician groups.
Triad filed a registration statement in conjunction with the initial public
offering of its common stock on September 11, 1997.

      In May 1997, the fund acquired 32,000 shares of common stock and 19,680
shares of preferred stock of Atlas Acquisition, Inc. ("AAI") for $32,000 and
$1,968,000, respectively. The Fund previously recorded $337,500 of such amount
as a "Deposit on pending investment" in the accompanying balance sheet at March
31, 1997. AAI was formed to acquire Atlas Supply, Inc., a 68 year old
distributor of "Atlas" branded tires, batteries and accessories sold primarily
to the auto repair and full service gas station markets.

      In June, 1997, the Fund acquired 35,000 shares of common stock of CRC
Holdings, Corp. for $3,199,000 and invested $959,700 in a 12% subordinated
promissory note. CRC Holdings, Corp. was formed to acquire CRC Evans Pipeline
International, Inc. which designs, manufactures and services specialized
pipeline construction and automatic welding equipment, which it rents and sells
worldwide.

      In July 1997, the Fund invested $2,000,000 in a 10% subordinated
promissory note of J & J Rental Services, Inc. Pursuant to such investment, the
Fund received warrants to buy 22,500 and 10,715 shares of J & J Rental Services,
Inc. common stock for $.0129 and $.01 per share, respectively, through June 30,
2007. J & J Rental Services, Inc. is an industrial and construction equipment
rental business. In addition, the Fund received warrants to buy 22,500 and
10,715 shares of J & J Realty, Inc. common stock for $.0129 and $.01 per share
respectively, through June 30, 2007. J & J Realty, Inc. owns the real estate on
which J & J Rental Services, Inc. operates.

      In the third quarter of 1997, the Fund advanced $376,127 shares under a
10% promissory note to Texrock Radio, Inc., in connection with a pending
investment in the radio industry.

      In September 1997, the fund acquired 2,498,452 shares of preferred stock
of Stephen L. LaFrance Holdings, Inc. ("LaFrance") for $2,498,452 and warrants
to buy up to 269 shares of LaFrance common stock for $.01 per share through
September 30, 2007. LaFrance owns and operates 68 retail drug stores in a 6
state area.

      During the nine months ended September 30, 1996, the Fund invested
$9,800,000 in three new Portfolio Companies and made follow-on investments in
nine portfolio companies of $9,407,665, including $435,679 in accrued interest
and dividends received in the form of additional portfolio securities and
$750,000 of common stock received through the net exercise of common stock
warrants.

                                       24
<PAGE>
      Of the  companies in which the Fund has  investments  at  September  30,
1997,  only Allied Waste  Industries,  Inc.,  American  Residential  Services,
Inc., Brazos Sportswear,  Inc., Coach USA, Inc., Drypers  Corporation,  Garden
Ridge  Corporation,  NCI  Building  Systems,  Inc. and  Paracelsus  Healthcare
Corporation,  Inc. and Raytel Medical  Corporation  are publicly held.  Travis
International,  Inc. and Triad Medical Inc. have filed registration statements
to offer  their  common  stock to the  public.  The  others  each have a small
number  of  shareholders  and  do not  generally  make  financial  information
available to the public.  However,  each  company's  operations  and financial
information  are reviewed by Management  to determine the proper  valuation of
the Fund's investment.

SUBSEQUENT EVENTS

      Subsequent to September 30, 1997, the Fund repaid a net $85,800,000 of
notes payable to the bank.

      In October 1997, the Fund, advanced an additional $374,186 under a 10%
promissory note to Texrock Radio, Inc., in connection with a pending investment
in the radio industry.

      On October 24, 1997, the Fund exercised its warrants to buy 33,215 shares
of common stock of J & J Rental Services, Inc. ("J & J") for $397. J & J was
then merged into United Rentals, Inc., and the Fund received a contingent
payment obligation of up to approximately $840,000 and stock values at
approximately $975,000 from the merged companies. In addition, the Fund received
payment in full of its $2,000,000 subordinated promissory note to J & J.

      On October 17, 1997, the Fund deposited $644,700 into an escrow account in
connection with its pending investment in Tulsa Industries, Inc., a manufacturer
of equipment for the oil and gas industry.

      In October 1997, the Fund made additional investments by advancing
$250,000 and $200,000 to Sovereign Business Forms, Inc. and Hot & Cool Holdings,
Inc., respectively, under subordinated promissory notes.

      In October 1997, the Fund received $501,548, which was included in
Accounts receivable at September 30, 1997. Such receivable represented an
advance to a co-investor in the Steven L. LaFrance Holdings, Inc.
investment.

ITEM 6.     EXHIBITS AND REPORTS ON FORM 8K

            (a)   Exhibits

            10.   Material Contracts

                  None

            (b)   REPORTS ON FORM 8 - K

      No reports on Form 8-K were filed by the Fund during the period for which
this report is filed.

                                       25
<PAGE>
                                    SIGNATURE

      Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this report to be signed by the
undersigned, thereunto duly authorized.

                                    EQUUS II INCORPORATED

                                    By: /s/ NOLAN LEHMANN
                                        Nolan Lehmann, President,
                                        Principal Financial and
                                        Accounting Officer

Date:  November 13, 1997

                                       26